Cryptos: Boom, Bust, Bubble?

When I’d first heard of cryptos, specifically Bitcoin – I was both in awe and envy for the character I imagined having held onto these tokens for nearly a decade. And I’m sure I wasn’t the only one. Despite the fairly obvious name: Cryptocurrency; the internet has mostly focused on it as a vehicle to quick riches. Fast-forward to around three years later, and I’m currently learning my ropes in crypto, reporting the current conditions, and still discovering more about the ever-changing landscape with varying factors every day. However, what hasn’t quite changed is the scenery amongst retail investors. What has changed however – is the number of people interested. It’s more than it was when I’d first heard of it.

 

Should You Crypto?

In an accepted sense – any object, tangible or otherwise, has value as long as a substantial set of people agree on the same. That is how our fiat currencies work these days, with the US Dollar finally de-linked from gold. That is how a lot of alternate investments garner value. And that is exactly how Bitcoins, Dogecoins, Etherium and all the other cryptocurrencies accumulate value. It is on this very note that one should remember that about 90% of crypto tokens in the markets are destined to fail for this very reason – garnering trust in the project and/or token.

The problem, in general, occurs for speculators however. Like any market, there will be people who are attracted to a topic based on the hype around it. Often, many of these people are busy individuals with day jobs, or backgrounds that don’t provide them the advantage of conducting thorough analysis on what they’re interested in. A root in such unchecked hype is essentially something that has contributed to the surge in the crypto boom over the last few years. The idea of monumental returns associated with parking your money for a set amount of time has long appealed people. Stories about the exponential growth in Bitcoin’s value over the past decade are just what drew people towards it.

 

What is Crypto then?

Crypto takes a different meaning based on who we’re talking to – because even if not stated explicitly, each one of us has different financial goals, and a different lens through which we see the same object.

In simplistic terms, crypto stands as a shortened colloquialism for Cryptocurrency. The term, as can be guessed from its components, is used to refer to a class of decentralised tokens that are available to users on their respective blockchain networks which are decentralized in nature. A decentralized blockchain implies the lack of a central authority, with the blockchain itself serving as a public ledger – noting every transaction that occurs on it. Its decentralized nature simply makes its ledgers (newly added blocks) tougher, and by logic, near impossible to hack. Cryptocurrency is used to refer to the tokens that are exchanged through these blockchains – as a form of currency.

The use of crypto tokens as a form of digital currency has many advantages for users who are well aware of the advantages the technology provides. The decentralized nature of these crypto blockchains ensures that they are beyond the control of central authority. The use of tokens as a form of currency on the network simply provides for a parallel transaction system outside the realm of central banks. For one, people get:

·        Anonymity

·        Low Cost Peer-to-Peer Transfer (especially across borders, where the traditional banking system levies heavy charges)

·        Transactions using Cryptocurrency – for the use of blockchains – are irreversible

·        Confidential Transactions (beyond the purview of any controlling authority)

These happen to be just some of the advantages of using cryptocurrencies as a form of digital currency.

 

What’s the Problem with Crypto if the above is True?

One of the existing problems with crypto is the ongoing debate itself: Can Cryptocurrencies be treated as Currencies?

Before one cites the obvious problem with regulation and authorities that any ordinary citizen would think of, there’s more looming questions to be addressed. The debate at the moment happens to be on the intangible tokens’ nature as assets or currencies in economic terms. A big attribute of currencies is their relative stability with respect to assets. Currencies are meant to be exchanged regularly, and while these legal tenders themselves undergo a change in value with time (inflation in general, as the prices of things go up – with money being as good as the things it can buy – a decent amount of inflation is required for an economy), the change isn’t as volatile and sudden.

Cryptocurrencies have multiple reasons for their volatile nature. Some primary reasons would have to be their smaller market cap and traded volume with respect to fiat currencies. One of the most popularly traded cryptocurrencies – Bitcoins, have a market cap of $990 Billion with a daily traded volume of $984 Million. The Forex daily volume for the USD stood at almost $6 Billion recently. Traded volumes hint at the number of players or participants in a certain asset class, or currency, and a larger number often implies differing tactics and motivations bringing a considerably stable pricing. Bitcoins, or any other cryptocurrencies on the other hand, have much smaller market capitalizations, and even have whales – people holding large amounts of tokens native to the blockchain it is traded or exchanged on. What this does is, provide power to whales. Large transactions by these big token holders often brings in big fluctuations in a token’s market – especially with respect to the size of the traded volume or market cap. The smaller it is – the more apparent the changes. This is one of the biggest attributes to cryptocurrencies’ volatile nature.

Another reason for it being treated as an asset class is the general investor opinion. A large number of retail investors have been attracted to the market purely for the purpose of capital gains. While even Forex markets house many speculators, cryptocurrencies with smaller market caps, when receiving multiple investors/traders solely for the purpose of capital gains, witness an asset-like approach to the same. This is what further adds onto its alternate investment identity, furthering the debate between its currency and asset class nature, with the former barely being used by most.

Another problem crypto investors and traders face, are the multiple forces and non-stop market. Unlike traditional markets limited by geographical boundaries and time-limits, cryptocurrencies operate in a 24-hour market across geographic borders, irrespective of where a certain investor invested his money from. With the non-stop market regulations, the already volatile market witnesses multiple changes and fluctuations non-stop, often becoming a nightmare to many traders and investors without nerves of steel, or an understanding of how the market works – even if it only gives them a considerable edge at predicting market movements of an untameable, unfathomable phenomena.

 

What’s perpetuating the continuous drive towards this Asset Class/Currency?

Crypto exchanges, AMCs with a bent towards this asset class, and other financial products providers associated with this. Unlike securities, cryptocurrencies are traded on multiple exchanges, which up until now are privately held in general. With their legality in question in many jurisdictions for the obvious implications of money laundering, terror funding and glaringly visible bleeding of money out of the central banking systems to aid the above, the operations of many of these exchanges are under challenge. While it is an accepted fact that the blockchain technology has its many apparent advantages which are not present with fiat money even if digitally exchanged using gatekeepers and commercial banks, Central Banks across the globe have planned their own CBDCs to counter the movement. While the de-centralized aspect would not be present with this movement, it certainly would give people access to many of blockchain’s advantages.

The movement of multiple people onto existing de-centralized Cryptocurrency tokens, however, could provide a layer of insulation to Cryptocurrency exchanges as new norms are underway. With a considerable amount of people, and confidence in the idea of the same, the legality of the same could be worked on much further.

The problem however lay with the practice of irresponsible advertising. An example of the same can be found below. While there are no implicit claims at this being a sure-shot lottery ticket to riches, it certainly is marketed as the smarter, new hip move for people to adopt with the tag-line ‘Bitcoin Liya Kya’ from this ad-campaign. The tag stands to question “Did you buy a Bitcoin”, everytime a snarky, snobby individual tries to rub the nose of the ad’s central character in their apparent wealth or prosperity.

Bottom Line?

Invest only if you understand.

This article is a first step, but a very small one.